EX-1 2 ex99-1.txt EXHIBIT 99.1 Exhibit 99.1 CONTACT: Investor Relations (214) 792-4415 SOUTHWEST AIRLINES REPORTS THIRD QUARTER 2005 EARNINGS; EXCEEDS FIRST CALL MEAN ESTIMATE DALLAS, TEXAS - October 20, 2005 - Southwest Airlines (NYSE:LUV) today reported third quarter 2005 net income of $227 million, or $.28 per diluted share, compared to $119 million for third quarter 2004, or $.15 per diluted share. The Company's third quarter 2005 results included $87 million (before income taxes) in unrealized gains, included in "Other gains", associated with derivative instruments that will settle in future accounting periods, recorded as a result of Statement of Financial Accounting Standard 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," as amended. Excluding these unrealized gains, third quarter 2005 net income was $174 million, or $.21 per diluted share. These third quarter 2005 results compare favorably to the First Call mean estimate of $.18 per diluted share. Gary C. Kelly, CEO, stated: "We are very pleased with our third quarter 2005 earnings performance. Excluding unrealized SFAS 133 gains, our third quarter 2005 earnings were up 47.5 percent to $174 million. This quarter was affected by two enormously destructive hurricanes, Katrina and Rita. The response by our Employees in the face of these crises was nothing short of remarkable. Their heroic efforts make these results very special, and I am very grateful to all our Employees for a tremendous performance. "The third quarter 2005 earnings growth was driven by record passenger revenues and load factors. We also benefited from strong performances in freight, charters, and business partner commissions. Operating revenues increased 18.8 percent versus a year ago, or 5.9 percent per available seat mile (ASM). The industry demand environment has improved, and the strong demand for our industry-leading low fares and high quality Customer Service resulted in a record third quarter load factor performance of 74.9 percent, at improved yields. We were able to drive robust revenue growth with only modest fare increases securing our Low Fare Brand leadership. We also benefited from a reduction in the glut of competitive seat capacity. We were very pleased with ATA codeshare third quarter 2005 results, which generated $19 million in revenues. ATA continues to reorganize in Chapter 11, and is seeking exit financing. As part of its reorganization efforts, ATA recently announced it will be discontinuing service in Chicago Midway to Minneapolis, Newark, and Boston in fourth quarter 2005. While our codeshare activity will decline, as a consequence, we will pursue opportunities to continue Southwest's growth at Midway. We have been pleased with our expansion efforts at Midway this year. "With respect to fourth quarter 2005, we are enjoying favorable load factor trends in October, and Customer bookings for the remainder of fourth quarter 2005 are good. We are hopeful year over year unit revenue trends will continue to improve as they did throughout third quarter 2005. "We continue to mitigate record-high jet fuel prices with our successful hedging program, which resulted in a $295 million benefit from settled contracts in third quarter 2005. We are also approximately 85 percent hedged in fourth quarter 2005 with average crude prices capped in the $26 per barrel range and have hedged the refinery margins on the majority of those positions. However, given the unprecedented surge in Gulf Coast jet fuel prices following Hurricanes Katrina and Rita, we expect fourth quarter 2005 jet fuel costs per gallon to be well above the third quarter 2005 jet fuel cost per gallon of 95 cents. Unless Gulf Coast jet fuel prices recede from current levels, our fourth quarter 2005 jet fuel cost per gallon could exceed $1.25. We are more than 70 percent hedged for 2006 with average crude prices capped in the $36 per barrel range and also have hedged the refinery margins on the majority of our 2006 positions. We are over 55 percent hedged in 2007 at approximately $37 per barrel; about 35 percent in 2008 at approximately $37 per barrel; and about 30 percent in 2009 at approximately $39 per barrel. In short, we are well-prepared for rising energy costs. Our People are taking aggressive actions to prepare for rising energy costs and sustain our profitability and financial health. "Excluding fuel, our third quarter 2005 unit costs were down, again, compared with the year ago performance. We revised our fourth quarter 2005 flight schedule for the significant reduction in our New Orleans service following Hurricane Katrina. Our fourth quarter 2005 flight schedule was also affected by the recent Boeing strike, which delayed scheduled new aircraft deliveries. As a result, our year-over-year capacity growth for fourth quarter 2005 will be approximately seven percent, less than previously planned. We expect our fourth quarter 2005 unit costs, excluding fuel, to modestly exceed third quarter's 6.31 cents. "Our hearts go out to all those affected by the hurricanes in the Gulf Coast region. We resumed service from Louis Armstrong New Orleans International Airport (MSY) on September 20th after it had been shut down for approximately three weeks. Prior to Hurricane Katrina, we were the largest air carrier with 57 daily departures. We currently operate four daily roundtrips to Houston Hobby Airport, with strong traffic and encouraging bookings. As a part of the New Orleans community, we are anxious to do our part to rebuild the city, and we will continue to add more flights based on demand. We are very proud of our Employees' efforts to serve our Customers in this stressful time. Finally, I am also very proud of how Southwest and our Employees took care of our Gulf Coast Employees in this time of need. "We are very pleased with the performance of our new Pittsburgh markets and our new Ft. Myers service, which began this month. Given the improving airline industry outlook, we are excited about our 2006 growth opportunities and, currently, we expect 33 Boeing 737-700 deliveries in 2006, which will result in an estimated 2006 ASM capacity growth of approximately eight percent. With the resumption of deliveries from Boeing, and the availability of aircraft created from Katrina-related schedule changes, we are accelerating the start-up of our previously planned new city next year to early 2006. I am very excited to announce that, after a 20-year absence, Southwest will return to Denver, Colorado. As a result of its efforts to dramatically reduce its costs over the years, Denver International Airport has emerged as an excellent opportunity for Southwest Airlines. Even better, our Customers, along with new Denver Customers, will benefit from lower fares and Positively Outrageous Customer Service, Southwest style. We will announce our start dates, schedule, and fares next week." Southwest will discuss its third quarter 2005 results on a conference call at 11:30 a.m. Eastern Time today. A live broadcast of the conference call will be available at southwest.com. Operating Results Total operating revenues for third quarter 2005 increased 18.8 percent to $1.99 billion, compared to $1.67 billion for third quarter 2004. Operating income was $273 million compared to $191 million in third quarter 2004. Revenue passenger miles (RPMs) increased 15.5 percent in third quarter 2005, as compared to a 12.1 percent increase in available seat miles (ASMs), resulting in a 2.2 point increase in load factor to 74.9 percent. The passenger revenue yield per RPM increased 2.6 percent to 11.68 cents from 11.38 cents in third quarter 2004. Operating revenue yield per ASM (RASM) increased 5.9 percent to 9.10 cents from 8.59 cents in third quarter 2004. Total third quarter 2005 operating expenses were $1.72 billion, an increase of 15.7 percent, compared to $1.48 billion in third quarter 2004. Operating expenses per ASM (CASM) for third quarter 2005 increased 3.2 percent to 7.85 cents, compared to 7.61 cents in third quarter 2004. The Company's hedging program produced realized gains in third quarter 2005 of $295 million. Gains of $276 million were recorded as a reduction in fuel and oil expense in third quarter 2005. The remainder of the realized gains were recorded in "Other gains," as described below. Excluding fuel, CASM for third quarter 2005 decreased slightly to 6.31 cents. In addition to the $87 million of SFAS 133 unrealized gains recorded in third quarter 2005, "Other expenses (income)" included $17 million in "other gains," which consisted primarily of SFAS 133 realized gains related to settled contracts, as defined, on current period hedges, partially offset by approximately $9 million of net interest expense. "Other expenses (income)" for third quarter 2004 included $4 million in "Other losses" and $6 million in net interest expense. The third quarter 2005 income tax rate was 38.3 percent versus 34.1 percent for third quarter 2004. The prior year rate was favorably impacted by an adjustment related to the ultimate resolution of an airline industry-wide issue regarding the tax treatment of certain aircraft engine maintenance costs. For the nine months ended September 30, 2005, net cash provided by operations was $2.2 billion, which included a $865 million increase in fuel hedge-related collateral deposits, and capital expenditures were $993 million. The Company ended third quarter 2005 with $2.4 billion cash on hand plus $185 million of auction-rate securities, classified as "Short-term investments". In addition, the Company had a fully available unsecured revolving credit line of $600 million. Total operating revenues for the nine months ended September 30, 2005 increased 14.8 percent to $5.60 billion while total operating expenses increased 11.3 percent to $4.94 billion, resulting in operating income of $656 million, compared to $435 million for the nine-month period in 2004. Net income for the nine-month period in 2005 was $462 million, or $.57 per diluted share, versus $258 million, or $.32 per diluted share, in 2004. Excluding the impact of the unrealized SFAS 133 gains recorded in third quarter 2005, net income for the nine months ended September 30, 2005 was $392 million, or $.48 per diluted share. This news release contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the plans, intentions, and expectations reflected in or suggested by the forward-looking statements. Additional information concerning the factors which could cause actual results to differ materially from the forward-looking statements are contained in the Company's periodic filings with the Securities and Exchange Commission, including without limitation, the Company's Annual Report on Form 10-K for the year ended 2004 and subsequent filings. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this press release. /more

SOUTHWEST AIRLINES CO. CONDENSED CONSOLIDATED STATEMENT OF INCOME (unaudited) Three months ended Nine months ended September 30, September 30, Percent Percent 2005 2004 Change 2005 2004 Change OPERATING REVENUES: Passenger $1,912 $1,612 18.6 $5,372 $4,694 14.4 Freight 32 28 14.3 99 82 20.7 Other 45 34 32.4 125 99 26.3 Total operating revenues 1,989 1,674 18.8 5,596 4,875 14.8 OPERATING EXPENSES: Salaries, wages, and Benefits 693 612 13.2 2,000 1,823 9.7 Fuel and oil 337 247 36.4 947 723 31.0 Maintenance materials and repairs 110 113 (2.7) 319 351 (9.1) Aircraft rentals 36 45 (20.0) 121 134 (9.7) Landing fees and other rentals 118 104 13.5 345 306 12.7 Depreciation and amortization 121 108 12.0 348 318 9.4 Other operating expenses 301 254 18.5 860 785 9.6 Total operating expenses 1,716 1,483 15.7 4,940 4,440 11.3 OPERATING INCOME 273 191 42.9 656 435 50.8 OTHER EXPENSES (INCOME): Interest expense 32 21 52.4 89 62 43.5 Capitalized interest (10) (10) 0.0 (28) (30) (6.7) Interest income (13) (5) 160.0 (31) (14) 121.4 Other (gains) losses, net (104) 4 n.a. (112) 16 n.a. Total other expenses (income) (95) 10 n.a. (82) 34 n.a. INCOME BEFORE INCOME TAXES 368 181 103.3 738 401 84.0 PROVISION FOR INCOME TAXES 141 62 127.4 276 143 93.0 NET INCOME $227 $119 90.8 $462 $258 79.1 NET INCOME PER SHARE: Basic $ .29 $ .15 93.3 $ .59 $ .33 78.8 Diluted $ .28 $ .15 86.7 $ .57 $ .32 78.1 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 789 781 786 784 Diluted 810 812 811 815

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SOUTHWEST AIRLINES CO. RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP ITEMS (SEE NOTE) (unaudited) Three months ended Nine months ended September 30, September 30, (In millions, except per share and Percent Percent per ASM amounts) 2005 2004 Change 2005 2004 Change Other (gains) losses, net, as reported $ (104) $ 4 $ (112) $ 16 Less: impact of unrealized gains 87 2 113 8 Other (gains) losses, net, excluding unrealized gains $ (17) $ 6 n.a. $ 1 $ 24 n.a. Net income, as reported $ 227 $ 119 $ 462 $ 258 Less: impact of unrealized gains, net of income taxes (53) (1) (70) (5) Net income, excluding unrealized gains $ 174 $ 118 47.5 $ 392 $ 253 54.9 Net income per share, diluted, as reported $ .28 $ .15 $ .57 $ .32 Less: impact of unrealized gains, net of income taxes (.07) - (.09) (.01) Net income per share, diluted, excluding impact of unrealized gains $ .21 $ .15 40.0 $ .48 $ .31 54.8 Fuel and oil expense - unhedged $ 613 $ 378 $1,574 $1,004 Less: gains on settled hedges included in fuel and oil expense (276) (131) (627) (281) GAAP fuel and oil expense 337 247 36.4 947 723 31.0 Add/(Deduct): losses/(gains) on settled contracts included in Other (gains) losses, net (22) - (21) 6 Add/(Deduct): losses/(gains) recognized in prior periods for settled contracts in the current period 3 - - (6) Fuel and oil expense - economic $ 318 $ 247 28.7 $ 926 $ 723 28.1 Mark-to-market (gains) losses on future period contracts included in Other (gains) losses, net $ (73) $ 2 $ (85) $ -Ineffectiveness from future period hedges included in Other (gains) losses, net (14) (4) (28) (8) Total unrealized gains from future period contracts included in Other (gains) losses, net $ (87) $ (2) $ (113) $ (8)

NOTE: The above schedule reconciles the non-GAAP financial measures included in this press release to the most comparable GAAP financial measures. The special items are unrealized gains or losses (before income taxes) for derivative instruments that will settle in future accounting periods, recorded as a result of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. These unrealized amounts relate to both ineffectiveness, as defined, for these future period instruments and the change in market value for future period deriviatives that no longer qualified for special hedge accounting, as defined in SFAS 133. In management's view, comparative analysis of results can be enhanced by excluding the impact of these items. The unrealized amounts are not indicative of the Company's operating performance for the applicable period, nor should they be considered in developing trend analysis for future periods. In addition, since fuel expense is such a large part of the Company's operating costs and is subject to extreme volatility, the Company believes it is useful to provide investors with the Company's true economic cost of fuel for the periods presented, based on cash settlements from hedging activities, but excluding the unrealized impact of hedges that will settle in future periods. /more

SOUTHWEST AIRLINES CO. COMPARATIVE CONSOLIDATED OPERATING STATISTICS (unaudited) Three months ended September 30, 2005 2004 Change Revenue passengers carried 20,637,620 18,334,448 12.6 % Enplaned passengers 23,595,749 21,102,752 11.8 % Revenue passenger miles (RPMs) (000s) 16,365,420 14,164,101 15.5 % Available seat miles (ASMs) (000s) 21,853,579 19,486,103 12.1 % Load factor 74.9% 72.7% 2.2 pts. Average length of passenger haul (miles) 793 773 2.6 % Average aircraft stage length (miles) 612 576 6.3 % Trips flown 261,812 248,981 5.2 % Average passenger fare $92.63 $87.90 5.4 % Passenger revenue yield per RPM (cents) 11.68 11.38 2.6 % Operating revenue yield per ASM (cents) 9.10 8.59 5.9 % Operating expenses per ASM (cents) 7.85 7.61 3.2 % Operating expenses per ASM, excluding fuel (cents) 6.31 6.34 (0.5)% Fuel costs per gallon, excluding fuel tax (unhedged) $1.837 $1.232 49.1 % Fuel costs per gallon, excluding fuel tax (GAAP) $1.006 $.803 25.3 % Fuel costs per gallon, excluding fuel tax (economic) $0.949 $.802 18.3 % Fuel consumed, in gallons (millions) 332 306 8.5 % Number of Employees at period-end 31,382 30,657 2.4 % Size of fleet at period-end 439 415 5.8 %

SOUTHWEST AIRLINES CO. COMPARATIVE CONSOLIDATED OPERATING STATISTICS (unaudited) Nine months ended September 30, 2005 2004 Change Revenue passengers carried 58,208,534 53,193,484 9.4 % Enplaned passengers 66,154,155 60,921,204 8.6 % Revenue passenger miles (RPMs) (000s) 45,083,739 40,282,260 11.9 % Available seat miles (ASMs) (000s) 63,424,106 56,641,218 12.0 % Load factor 71.1% 71.1% - Average length of passenger haul (miles) 775 757 2.4 % Average aircraft stage length (miles) 605 572 5.8 % Trips flown 769,262 729,836 5.4 % Average passenger fare $92.30 $88.23 4.6 % Passenger revenue yield per RPM (cents) 11.92 11.65 2.3 % Operating revenue yield per ASM (cents) 8.82 8.61 2.4 % Operating expenses per ASM (cents) 7.79 7.84 (0.6)% Operating expenses per ASM, excluding fuel (cents) 6.30 6.56 (4.0)% Fuel costs per gallon, excluding fuel tax (unhedged) $1.631 $1.122 45.4 % Fuel costs per gallon, excluding fuel tax (GAAP) $.978 $.806 21.3 % Fuel costs per gallon, excluding fuel tax (economic) $.956 $.806 18.6 % Fuel consumed, in gallons (millions) 961 891 7.9 % Number of Employees at period-end 31,382 30,657 2.4 % Size of fleet at period-end 439 415 5.8 %

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SOUTHWEST AIRLINES CO. CONDENSED CONSOLIDATED BALANCE SHEET (unaudited) September 30, December 31, (in millions) 2005 2004 ASSETS Current assets: Cash and cash equivalents $2,428 $1,048 Short-term investments 185 257 Accounts and other receivables 334 248 Inventories of parts and supplies, at cost 153 137 Fuel hedge contracts 944 428 Prepaid expenses and other current assets 65 54 Total current assets 4,109 2,172 Property and equipment, at cost: Flight equipment 10,786 10,037 Ground property and equipment 1,266 1,202 Deposits on flight equipment purchase contracts 657 682 12,709 11,921 Less allowance for depreciation and amortization 3,364 3,198 9,345 8,723 Other assets 1,292 442 $14,746 $11,337 LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $495 $420 Accrued liabilities 2,038 1,047 Air traffic liability 776 529 Current maturities of long-term debt 149 146 Total current liabilities 3,458 2,142 Long-term debt less current maturities 1,861 1,700 Deferred income taxes 2,311 1,610 Deferred gains from sale and leaseback of aircraft 140 152 Other deferred liabilities 221 209 Stockholders' equity: Common stock 790 790 Capital in excess of par value 297 299 Retained earnings 4,474 4,089 Accumulated other comprehensive income 1,194 417 Treasury stock, at cost - (71) Total stockholders' equity 6,755 5,524 $14,746 $11,337

/more CASH FLOWS FROM OPERATING ACTIVITIES: Net income $227 $119 $462 $258 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and Amortization 121 108 348 318 Deferred income taxes 138 60 271 141 Amortization of deferred gains on sale and leaseback of aircraft (4) (4) (12) (12) Amortization of scheduled airframe inspections & repairs 13 13 36 40 Changes in certain assets and liabilities: Accounts and other receivables (42) (24) (85) (74) Other current assets (83) (21) (93) (33) Accounts payable and accrued liabilities 216 111 1,006 393 Air traffic liability 28 (15) 246 182 Other (12) 13 (23) (7) Net cash provided by operating activities 602 360 2,156 1,206 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net (274) (496) (993) (1,366) Change in short-term investments, net (185) 16 72 36 Acquisition of assets from ATA Airlines, Inc. - - (6) - Net cash used in investing activities (459) (480) (927) (1,330) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of long-term debt - 350 300 408 Proceeds from Employee stock plans 21 12 58 52 Payments of long-term debt and capital lease obligations (1) (1) (136) (22) Payments of cash dividends (4) (4) (14) (14) Repurchase of common stock - (110) (55) (246) Other, net - (3) (2) (7) Net cash provided by (used in) financing activities 16 244 151 171 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 159 124 1,380 47 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,269 1,407 1,048 1,484 CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,428 $1,531 $2,428 $1,531 /more

Southwest Airlines Co. Current Boeing 737-700 Delivery Schedule Prior Schedule Current Schedule Firm Options* Firm Options* 2005 34 - 33** - 2006 34 - 33 - 2007 25 29 27 29 2008 6 45 6 45 2009-2012 - 177 - 177 Total 99 251 99 251

*Includes purchase rights ** Includes 27 aircraft delivered through September 30, 2005